Answers to your flood zone questions

"If the flood insurance policy shows a lower risk zone than the Standard Flood Hazard Determination Form, the lender should investigate the discrepancy. "

Question: We recently pulled a flood determination that showed a property located in Zone A. When the borrower went to purchase flood insurance, the insurance agent issued a policy in Zone X. How do we resolve the discrepancy? Can we accept a policy written in Zone X?

Answer: The regulations require you to match the flood zones on the determination with the policy (or at least it needs to be in the same risk zone) unless the property falls under the "grandfather rule." Zone X is not in the same risk zone as Zone A. You would need to tell the agent to write the policy for Zone A or have him complete a LOMA through FEMA. If he refuses or can't find an agreement, then you can refer him to the FEMA memo from April 2008, which provides, in part:

Procedures Relating to Flood Zone Discrepancies (April 16, 2008, page 2):

"Effective May 1, 2008, WYO companies and the NFIP Servicing Agent are hereby directed to use the most hazardous flood zone for rating when presented with two different flood zones, unless the building qualifies for the 'grandfathering rule.' If the policyholder wants to dispute the high-risk flood zone determination, procedures are available, including the Letter of Determination Review (LODR) and the Letter of Map Amendment. These are cited in the Code of Federal Regulations, (CFR) at 44 CFR 65.17, Review of Determination. More detailed information concerning the LODR process is available from the FEMA website www.fema.gov/plan/ preven t/fhm/fq_proc.shtm#fldproc81."

Additionally, the 2012 FAQ from the FDIC provides some guidance on flood discrepancies as well.

Question. We were told at a webinar that if the flood zone on our flood certificate and the flood zone from the certificate pulled by the flood insurance company do NOT match, they have an obligation to comply with the highest or worst zone. However, if they do not, we will be covered by showing due diligence that we asked them to change it and document the file as such. Is this correct?

Answer: Questions and Answers #71 and #72 from the "Interagency Questions and Answers Regarding Flood Insurance" discuss expectations of lenders in the case of zone discrepancies. Lenders should review these Q&As closely to ensure full compliance. In summary, a lender should only be concerned if the discrepancy is between a high-risk zone (A or V) and a low- or moderate-risk zone (B, C, D or X).

If the flood insurance policy shows a lower risk zone than the Standard Flood Hazard Determination Form, the lender should investigate the discrepancy. A lender should determine if the "grandfather rule" applies, which in some cases allows a borrower to benefit from a prior, more favorable rating. A discrepancy resulting from the "grandfather rule" is reasonable and acceptable, but should be documented and substantiated by the lender.

If a zone discrepancy appears to be the result of a mistake, a lender should recheck its determination. If there still appears to be a discrepancy after the recheck, a lender and borrower may jointly request that FEMA review the determination obtained by the lender.

FEMA will only conduct this review if the request is submitted within 45 days of the date the lender notified the borrower that the building is in a SFHA. If the discrepancy is not resolved or the borrower, insurance company or insurance agent is uncooperative in assisting the lender, according to the answer to question #71, "the lender should notify the insurance agent about the insurer's duty pursuant to FEMA's letter of April 16, 2008 (W-08021), to write a flood insurance policy that covers the most hazardous flood zone. When providing this notification, the lender should include its zone information and it should also notify the insurance company itself. The lender should substantiate these communications in its loan file."

Question: We have had a loan since 2002 and the flood policy always listed the property as being in flood zone "B." A review of this file prompted us to pull a current determination, which indicated zone "A9." To be sure, we pulled a second determination with a different provider and again it indicated zone "A9." We sent a 45-day notice to the borrowers advising that they needed to get the zone changed on their policy to reflect zone "A9." Their insurance agent advised us that the company writing their insurance had determined the property to be in zone "B." We asked for a copy of their determination and the agent stated the company didn't have it because the insurance provider took care of that.

We contacted the insurance company and it stated, it was right on the line between zone "B" and "A9," too close to call, so it opted to insure the property in zone "B." We have again advised the borrower and the insurance agent that pursuant to FEMA's letter of April 16, 2008, when there is a discrepancy in zones, it is the insurance company's duty to write a flood insurance policy that covers the most hazardous flood zone, which in this case is zone "A9." We have advised that if it does not, we will force place coverage in zone "A9."

Is this the proper procedure? If so, do we force place coverage? Also, if the borrowers currently carry more insurance than necessary for the bank's purposes, should we force place only for the amount that is required (lesser of loan amount, RCV or $250,000) or should we insure for the amount the borrowers currently have? Lastly, as there can only be one outstanding flood insurance policy per building, do we advise borrowers to cancel their current policy?

Answer: Yes, the bank's procedures are adequate; however, the bank should not force place flood insurance based on a zone discrepancy when flood insurance is already in place. The bank should document the communication with the insurance agent. According to Q&A #71, a lender and borrower may jointly request that FEMA review the determination to confirm or review the accuracy of the determination; however, FEMA will only conduct this review if it is submitted within 45 days of the date the lender notified the borrower that a building or manufactured home is in an SFHA and flood insurance is required. ^

By Dimitris Rousseas, Associate General Counsel, Compliance Alliance